Whose pension money is it anyway?
In a week when the South African Revenue Services (SARS) announced their intention to dip into defaulting taxpayers’ bank accounts, another clever way to access taxpayer funds emerged. We’re talking about the plan to use some money from the Government Employees Pension Fund (GEPF) to bankroll massive infrastructure projects. On Friday, fund chairman Arthur Moloto told Reuters the GEPF would focus on energy and clean technology projects, as well those projects that would create jobs! Is the chairman of the funds’ board within his rights to make this announcement?
The GEPF, like any other local pension fund, is administered on behalf of its members by a board of trustees. And the board contracted with the Public Investment Corporation (PIC) to manage the R819 billion (at 31 March 2010) capital held by the GEPF in the best interests of its members. The PIC has massive stakes in some of the country’s top listed companies, including MTN Group. There’s nothing wrong with the GEPF altering the PIC’s investment mandate from time to time – except the latest instruction smacks of political meddling: “We are re-directing the PIC to focus more on infrastructure deals,” said Moloto, before adding that a “rough figure of 30 billion rand [was] available for this.”
Safe investments, but
Experts are divided on the strategy fund trustees should apply. Some argue they should strive for the best possible mix of risk and return, while others prefer a liability matching investment strategy. Either way, the trustees have to manage the funds to ensure the requirements of individual fund members are met over the long term. The GEPF board hasn’t lost sight of this objective. “For us what is important is to get a good return on those investments, it’s not charity,” observed Moloto. The decision to invest in (or purchase bonds in) state-owned companies such as Eskom or Transnet is sensible at face value.
The GEPF has carefully considered the investment options available to it and decided to channel just more than 3% of its total capital to government-linked infrastructure projects. The returns on these projects will hopefully match or better the best risk / return mix they can achieve in the open market.
5% of private pension funds
The experts reckon less than 1.0% of the country’s R3 trillion savings pot is currently dedicated to socially responsible investment (SRI). At a Growth Summit held in South Africa in 2003 it was proposed that 5% of South Africa’s savings capital be invested in development projects. In April 2010, Ebrahim Patel, minister of economic affairs, revisited this idea. He told parliament he would like to see at least R70bn of government and private pension fund assets applied to capital intensive infrastructure and development projects. The GEPF announcement could be viewed as the first step in ‘finding’ this R70bn. What the media – and GEPF pension fund members – need to decide, is whether government’s influence over pension fund board members’ investment direction is appropriate.
Government’s plan has supporters and detractors. Many say the ‘interference’ in pension fund investment decisions is irresponsible, forcing people to invest in low-yielding investments. Supporters say the benefits from infrastructure investments far outweigh the small sacrifices – and they would be small – individual fund members would have to make. Where does FAnews Online stand on the issue?
On a net basis we think it’s a great idea, provided government doesn’t dictate terms to the pension fund industry. If government needs to ‘borrow’ funds, who better than local pension fund to provide them. But government should raise these funds using traditional methods. The state utilities can issue corporate bonds – government can issue treasury bonds – and the pension funds can choose to purchase these financial instruments on their existing investment criteria. A purchase of government paper is, by and large, an investment in infrastructure. Government may be surprised how much of private pension money is already applied to public infrastructure ventures!
Editor’s thoughts: There are a number of ways for government to obtain funding for development, including World Bank and International Monetary Fund loans, taxation and issuing government paper. Would you be happy if your pension fund became a direct investor in a massive infrastructure project? Add your comment below, or send it to [email protected]
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